Dubai World crisis dispels wishful thinking

The Dubai World crisis has forced sukuk bond investors to wake up to the reality that sukuk isn’t completely straightforward, said Farmida Bi, a partner at Norton Rose, speaking at the Reuters Islamic Banking and Finance Summit in London on Monday.

“There seems to have been a lot of wishful thinking around implied (sovereign) guarantees and enforcement, which isn’t straightforward in this region,” she said.

In Dubai, for example, there are several distinct secular legal systems to grapple with, as well as Sharia law. “No one has worked out how these interact – it remains an untested legal system,” Bi said.

Bondholders of a $3.5 billion sukuk issued by Dubai World’s Nakheel subsidiary, a property developer, were forced to consider a debt repayment standstill request late last year. Wrangling around the restructuring continues.

Bi said that some investors had failed to understand where their recourse lies in the event of a default. “Many don’t seem to have done their homework – some of them thought they had recourse to the underlying asset and they don’t,” she said. “It seems to be a sort of willful blindness.”

She pointed out that the prospectus clearly explained what investors were buying in to, and Norton Rose has floated the idea of putting a friendly warning that investors don’t have recourse to the assets on the cover of the prospectuses in bold.

“The whole Dubai World crisis showed that investors need to be careful about what they are buying,” she said.